Business View: The currency of international trade

As exports continue to play an important role in the ongoing economic recovery, the current environment represents an important opportunity for Massachusetts' exporters - particularly exporters dealing with countries whose currencies have been down against the U.S. dollar.

Many U.S. exporters assume that dealing in U.S. dollars reduces their foreign exchange risk. In fact, risk is an element of any cross-border transaction. For exporters who insist on payment in U.S. dollars, these risks include:

- Adverse exchange rate moves: When price is negotiated, no one can predict what exchange rates will be when the transaction is settled.

- Hidden costs: When U.S. exporters demand payment in U.S. dollars, their buyers must convert their local currencies. Any intermediary institution involved in the transaction will add its own fee.

- Cash flow disruption: Cross-border trades take longer to complete than domestic deals in part because the exchange process itself can involve many parties. When the buyer is managing the foreign exchange, or FX, the exporter may have little control over how long the process takes, which makes working capital more difficult and unpredictable.

- Competitive handicaps: U.S. exporters who rely on dealing in U.S. dollars are potentially losing sales and handicapping themselves in price negotiations before they even start. If competitors are willing and able to quote prices in the local currency, they will gain a competitive advantage because the unknown cost of currency conversion is not part of the deal.
Ideally, exporters should take control of and "own" the deal by managing all aspects of foreign exchange themselves. This approach allows U.S. exporters to build the FX risk into their pricing to account for the potential of adverse exchange rate moves and the incremental costs of the exchange process itself.

Taking control of the deal can also help exporters:

- Control a variety of costs imposed by intermediary players that drive up prices with fees.

- Help ensure the timing and finality of payment.

- Maintain a competitive advantage versus the local competition.

Any overseas business transaction includes potential risks and rewards. Successfully navigating the international marketplace can mean new or substantially expanded markets for those Massachusetts companies that are managing the challenges and opportunities of foreign exchange.